NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
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|
NOTE 1.
|
Basis of Financial Statement Presentation
|
WABCO Holdings Inc. and its subsidiaries (collectively WABCO, Company, we, or our) engineer, develop, manufacture and sell integrated systems controlling advanced braking, stability, suspension, steering, transmission automation, as well as air compression and processing primarily for commercial vehicles. WABCO’s largest selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), electronic stability control (ESC) systems, brake controls, automated manual transmission systems (AMT), air disc brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for medium- and heavy-duty trucks, buses and trailers. In addition, we supply commercial vehicle aftermarket distributors and service partners as well as fleet operators with replacement parts, fleet management solutions, diagnostic tools, training and other expert services. WABCO sells its products primarily to two groups of customers around the world: original equipment manufacturers (OEMs) including truck and bus, trailer, car and off-highway, and commercial vehicle aftermarket distributors of replacement parts and services as well as commercial vehicle fleet operators for management solutions and services. We also provide remanufacturing services globally.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, including normal recurring items, considered necessary for a fair presentation of financial data have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K.
As previously announced, on March 28, 2019, WABCO entered into an Agreement and Plan of Merger (the Merger Agreement) with ZF Friedrichshafen AG (ZF), a stock corporation organized and existing under the laws of the Federal Republic of Germany, and Verona Merger Sub Corp., a Delaware corporation and indirect wholly owned subsidiary of ZF, pursuant to which ZF will acquire 100% of the issued and outstanding shares of WABCO common stock (the Merger). The Merger Agreement was adopted by WABCO’s shareholders at the June 27, 2019 special meeting of shareholders. Consummation of the Merger is subject to customary closing conditions and regulatory approvals and is expected to close in early 2020. Due to the pending Merger, the Company has suspended previously announced changes to its internal reporting. The Company will maintain its current internal reporting to the chief operating decision maker and continue to operate as one reportable segment.
All majority-owned subsidiaries of WABCO are included in the condensed consolidated financial statements and intercompany transactions are eliminated upon consolidation. WABCO’s investments in unconsolidated joint ventures are included at cost plus its equity in undistributed earnings less dividends and changes in foreign currency in accordance with the equity method of accounting and reflected as investments in unconsolidated joint ventures in the condensed consolidated balance sheets. Certain amounts in the prior year’s condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation.
The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 16 to the Consolidated Financial Statements for the year ended December 31, 2018, in the Company’s Annual Report on Form 10-K, describe the most significant accounting estimates and policies used in the preparation of the Consolidated Financial Statements. Actual results in these areas could differ materially from management’s estimates. There have been no significant changes in the Company’s assumptions regarding critical accounting estimates during the first nine months of 2019.
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NOTE 2.
|
Recently Issued Accounting Standards
|
Recently Adopted Accounting Standards
In June 2018, the FASB issued ASU 2018-07 Compensation-Stock Compensation (Topic 718), to simplify the accounting for share–based payments granted to nonemployees by aligning the accounting with the requirements for employee share–based compensation. ASU 2018-07 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the guidance as of January 1, 2019. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.
In February 2018, the FASB issued ASU 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows for certain stranded tax effects within Accumulated Other Comprehensive Income (AOCI), resulting from the U.S. Tax Cuts and Jobs Act, to be reclassified to retained earnings. ASU 2018-02 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the provisions of ASU 2018–02 as of January 1, 2019. There was a one–time reclassification of $8.4 million from AOCI to retained earnings related to the remeasurement of deferred taxes recorded in other comprehensive income based on the newly enacted corporate tax rate. Refer to Note 13 for additional detail regarding the components of the reclassification.
In August 2017, the FASB issued ASU 2017-12 Targeted Improvements to Accounting for Hedging Activities, which aims at improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements, by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. ASU 2017-12 is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. The Company adopted the provisions of ASU 2017–12 as of January 1, 2019. There was no material impact on the Company's condensed consolidated financial statements resulting from the adoption of this guidance.
In February 2016, the FASB issued ASU 2016-02 and subsequent amendments, collectively known as ASC 842 Leases. ASC 842 requires recognition of operating leases as lease assets and liabilities on the balance sheet and also requires the disclosure of key information about leasing arrangements. The Company has elected to adopt ASC 842 by applying the modified transition method and has elected to use the effective date of January 1, 2019 as the initial date of application. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the Company will continue to account for existing leases in accordance with previous accounting guidance throughout the entire lease term including periods after the effective date. The remeasurement or modification of a lease after the effective date requires application of the new guidance. The Company has also elected the practical expedient under ASU 2018-01 Land Easement and will apply previous judgments under previous guidance as to the recognition of land easements as a lease.
The adoption of ASC 842 resulted in the recognition of operating lease right-of-use (ROU) assets of $110.1 million and operating lease liabilities of $111.2 million on the effective date. The new guidance did not have a material impact on the condensed consolidated statement of operations or statement of cash flow. The accounting for finance leases under ASC 842 remained substantially unchanged from previous accounting guidance and are not material. See Note 11 for the disclosures required by ASC 842 and accounting policy information for leases.
Pending Adoption of Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU removes the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. The ASU requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and
losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact on its disclosures.
In January 2017, the FASB issued ASU 2017-04 Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (the Step 2 test) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. The standard is effective for the Company beginning January 1, 2020 and will be applied to any annual or interim goodwill impairment assessment after that date. Early adoption is permitted for interim and annual impairment testing after January 1, 2017. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016–13 Financial Instruments–Credit Losses to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. For trade and other receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance is effective for fiscal years beginning after December 15, 2019 and must be applied through a cumulative-effect adjustment to retained earnings as of the period of adoption. The Company has established a team to evaluate the application of the current expected credit loss model (CECL), as required by this standard, to its financial assets subject to credit losses. Based on the scoping and gap analysis performed for its financial assets, implementation efforts are primarily focused on the application of CECL to trade accounts receivable, including incorporating CECL into the methodology, model and assumptions used in determining the allowance for doubtful accounts. The Company has not completed the analysis for determining the impact that this new guidance will have on the condensed consolidated financial statements.
We do not expect the pending adoption of other recently issued accounting standards to have an impact on the condensed consolidated financial statements.
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NOTE 3.
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Revenue from Contracts with Customers
|
The Company follows the guidance under ASC 606 effective January 1, 2018. Revenue under ASC 606 is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer, which is typically at a point in time. Estimates of variable consideration are included in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved.
Disaggregation of Revenue
The following table presents product sales disaggregated by end-market:
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|
|
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|
|
|
|
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|
|
|
|
|
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Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
OEM
|
|
$
|
578.3
|
|
|
$
|
677.7
|
|
|
$
|
1,974.7
|
|
|
$
|
2,200.1
|
|
Aftermarket
|
|
220.1
|
|
|
237.1
|
|
|
669.3
|
|
|
719.3
|
|
Total sales
|
|
$
|
798.4
|
|
|
$
|
914.8
|
|
|
$
|
2,644.0
|
|
|
$
|
2,919.4
|
|
The following table presents product sales disaggregated by geography, based on the billing addresses of customers:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
United States
|
|
$
|
215.5
|
|
|
$
|
228.8
|
|
|
$
|
657.9
|
|
|
$
|
666.0
|
|
Europe
|
|
390.9
|
|
|
448.2
|
|
|
1,320.6
|
|
|
1,471.1
|
|
Other (1)
|
|
192.0
|
|
|
237.8
|
|
|
665.5
|
|
|
782.3
|
|
Total sales
|
|
$
|
798.4
|
|
|
$
|
914.8
|
|
|
$
|
2,644.0
|
|
|
$
|
2,919.4
|
|
|
|
(1)
|
Sales to other regions includes revenues primarily from Japan, China, Brazil and India.
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Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to performance obligations to be satisfied in the future. Contract assets and contract liabilities were not material as of September 30, 2019 and December 31, 2018.
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2019 and 2018 were not material. The Company has elected to apply the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
NOTE 4. Accumulated Other Comprehensive Loss
The table below presents the changes in accumulated other comprehensive loss for the three and nine month periods ended September 30, 2019 and 2018.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency translation adjustments :
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(242.9
|
)
|
|
$
|
(218.3
|
)
|
|
$
|
(243.0
|
)
|
|
$
|
(177.6
|
)
|
Adoption of ASU 2018-02 (Note 2)
|
—
|
|
|
—
|
|
|
(7.1
|
)
|
|
—
|
|
Adjustment for the period
|
(34.6
|
)
|
|
(31.0
|
)
|
|
(27.4
|
)
|
|
(71.7
|
)
|
Balance at end of period (1)
|
(277.5
|
)
|
|
(249.3
|
)
|
|
(277.5
|
)
|
|
(249.3
|
)
|
|
|
|
|
|
|
|
|
Losses on intra-entity transactions:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(11.9
|
)
|
|
(12.2
|
)
|
|
(11.9
|
)
|
|
(11.8
|
)
|
Adjustment for the period
|
—
|
|
|
0.2
|
|
|
—
|
|
|
(0.2
|
)
|
Balance at end of period (2)
|
(11.9
|
)
|
|
(12.0
|
)
|
|
(11.9
|
)
|
|
(12.0
|
)
|
|
|
|
|
|
|
|
|
Unrealized gains on investments:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Adjustment for the period
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Balance at end of period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Unrealized losses on hedges:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
Adjustment for the period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amounts reclassified to earnings, net
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
Balance at end of period
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Pension and post-retirement plans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
(260.0
|
)
|
|
(257.4
|
)
|
|
(269.1
|
)
|
|
(274.4
|
)
|
Adoption of ASU 2018-02 (Note 2)
|
—
|
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
Other comprehensive loss/(income) before reclassifications
|
9.3
|
|
|
(1.8
|
)
|
|
10.6
|
|
|
6.5
|
|
Amounts reclassified to earnings, net (3)
|
4.0
|
|
|
4.4
|
|
|
13.1
|
|
|
13.1
|
|
Balance at end of period
|
(246.7
|
)
|
|
(254.8
|
)
|
|
(246.7
|
)
|
|
(254.8
|
)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of period
|
$
|
(536.1
|
)
|
|
$
|
(516.1
|
)
|
|
$
|
(536.1
|
)
|
|
$
|
(516.1
|
)
|
(1) Includes an accumulated gain of $0.5 million, net of taxes of $1.6 million as of September 30, 2019 and an accumulated loss of $23.2 million, net of taxes of $14.1 million, as of September 30, 2018 related to foreign currency gains and losses on Euro-denominated debt and foreign currency contracts designated and qualifying as partial hedges of a net investment. This includes the one-time adjustment of currency translation related to the adoption of ASU 2018-02 of $7.1 million disclosed above.
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|
(2)
|
Relates to intra-entity foreign currency transactions that are of a long term investment nature, when the entities to the transaction are consolidated, combined or accounted for by the equity method in the Company's financial statements.
|
|
|
(3)
|
Consists of amortization of prior service cost and actuarial losses that are included as a component of pension and post-retirement expense within other non-operating expenses. The amounts reclassified to earnings are recorded net of tax of $1.6 million and $1.8 million for the three month periods ended September 30, 2019 and 2018, respectively, and $5.2 million and $5.4 million for the nine month periods ended September 30, 2019 and 2018, respectively.
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NOTE 5. Inventories, net
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
As of September 30, 2019
|
|
As of December 31, 2018
|
Finished products
|
$
|
172.9
|
|
|
$
|
185.2
|
|
Products in process
|
13.6
|
|
|
15.3
|
|
Raw materials
|
171.6
|
|
|
137.1
|
|
Inventories, gross
|
358.1
|
|
|
337.6
|
|
Less: inventory allowances
|
(16.8
|
)
|
|
(18.5
|
)
|
Inventories, net
|
$
|
341.3
|
|
|
$
|
319.1
|
|
Inventory costs are primarily comprised of direct material and labor costs, as well as material overhead such as inbound freight and custom and excise duties.
NOTE 6. Guaranteed Notes Receivable
The Company holds guaranteed notes receivable from reputable state owned and public enterprises in China that are settled through bankers acceptance drafts, which are registered and endorsed to the Company. These notes receivable are fully guaranteed by banks and generally have contractual maturities of six months or less, but the ultimate recourse remains against the trade debtor. These guaranteed drafts are available for discounting with banking institutions in China or transferring to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first nine months of 2019 and 2018 were $190.1 million and $216.1 million, respectively. The expenses related to discounting were $0.3 million and $1.3 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $1.8 million, for the three and nine months ended September 30, 2018, respectively. The fair value of these guaranteed notes receivable is determined based on Level 2 inputs including credit ratings and other criteria observable in the market and was equal to their carrying amounts of $34.8 million and $44.1 million as of September 30, 2019 and December 31, 2018, respectively.
The Company monitors the credit quality of both the drawers of the drafts and guarantors on a monthly basis by reviewing various factors such as payment history, level of state involvement in the institution, size, national importance as well as current economic conditions in China. Since the Company has not experienced any historical losses nor is expecting future credit losses based on a review of the various credit quality indicators described above, we have not established a loss provision against these receivables as of September 30, 2019 or December 31, 2018.
NOTE 7. Net Income Attributable to Company per Share
Basic net income attributable to Company per share has been computed using the weighted average number of common shares outstanding. The average number of outstanding shares of common stock used in computing diluted net income attributable to Company per share includes weighted average incremental shares when the impact is not anti-dilutive. The weighted average incremental shares represent the net amount of shares the Company would issue upon the assumed exercise of in-the-money stock options and vesting of restricted stock units (RSUs) and deferred stock units (DSUs) after assuming that the Company would use the proceeds from the exercise of options to repurchase stock. The weighted average incremental shares also includes the net amount of shares issuable for performance stock units (PSUs) at the end of the reporting period, if any, based on the number of shares issuable if the end of the period were the end of the vesting period.
Anti-dilutive shares, if applicable, are excluded and represent those options, RSUs, DSUs and PSUs whose assumed proceeds were greater than the average price of the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average incremental shares included
|
143,474
|
|
|
166,173
|
|
|
141,163
|
|
|
179,951
|
|
Shares excluded due to anti-dilutive effect
|
—
|
|
|
—
|
|
|
51
|
|
|
—
|
|
NOTE 8. Capital Stock
The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the nine month periods ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
Total Shares
|
|
Treasury Stock
|
|
Net Shares
Outstanding
|
|
Total Shares
|
|
Treasury Stock
|
|
Net Shares
Outstanding
|
Balance at beginning of period
|
79,018,266
|
|
|
(27,653,341
|
)
|
|
51,364,925
|
|
|
78,937,828
|
|
|
(25,202,342
|
)
|
|
53,735,486
|
|
Shares issued upon exercise of stock options
|
10,689
|
|
|
18,582
|
|
|
29,271
|
|
|
10,795
|
|
|
11,459
|
|
|
22,254
|
|
Shares issued upon vesting of RSUs
|
41,361
|
|
|
6,226
|
|
|
47,587
|
|
|
19,198
|
|
|
8,326
|
|
|
27,524
|
|
Shares issued for deferred compensation
|
9,730
|
|
|
—
|
|
|
9,730
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issued for DSUs
|
6,307
|
|
|
—
|
|
|
6,307
|
|
|
7,833
|
|
|
—
|
|
|
7,833
|
|
Shares issued upon vesting of PSUs
|
56,521
|
|
|
11,823
|
|
|
68,344
|
|
|
37,712
|
|
|
6,009
|
|
|
43,721
|
|
Shares purchased for treasury
|
—
|
|
|
(272,000
|
)
|
|
(272,000
|
)
|
|
—
|
|
|
(1,669,490
|
)
|
|
(1,669,490
|
)
|
Balance at end of period
|
79,142,874
|
|
|
(27,888,710
|
)
|
|
51,254,164
|
|
|
79,013,366
|
|
|
(26,846,038
|
)
|
|
52,167,328
|
|
The Company accounts for purchases of treasury stock under the cost method with the costs of such share purchases reflected in treasury stock in the accompanying condensed consolidated balance sheets. Upon the exercise or vesting of an equity incentive award, the Company may reissue shares from treasury stock or may elect to issue new shares. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired since the inception of the share buy back programs, net of shares previously reissued. Gains on the reissuance of treasury shares are recorded as capital surplus. Losses on the reissuance of treasury shares are charged to capital surplus to the extent of previous gains recorded, and to retained earnings for any losses in excess. The Company has reissued, on a cumulative basis, a total of 147,462 treasury shares related to certain employee vestings under its equity incentive program through September 30, 2019.
On December 7, 2018, the Board of Directors authorized the repurchase of shares of common stock for an amount of $600.0 million through December 31, 2020. As of September 30, 2019 the Company has purchased 272,000 shares for $30.6 million and has $569.4 million remaining under this repurchase authorization. The Company suspended its share repurchase program due to the pending Merger.
NOTE 9. Stock-Based Compensation
The Company records stock-based compensation expense in the condensed consolidated statements of operations for stock options and RSUs based on the grant date fair value, determined by the closing market price of the Company’s common stock on the date of grant. RSUs vest in equal annual installments over three years. As of September 30, 2019, the stock option awards are fully vested.
As part of its equity incentive program, the Company grants PSUs, the vesting of which would occur, if at all, and at levels that depend upon the achievement of three-year cumulative goals tied to earnings per share. The Company assesses the expected achievement levels at the end of each reporting period. The grant date fair value of the number of awards expected to vest based on the Company’s best estimate of ultimate performance against the respective targets is recognized as compensation expense on a straight-line basis over the requisite vesting period of the awards. As of September 30, 2019, the Company believes it is probable that the performance conditions will be met and has recognized compensation expense accordingly.
The Company also grants DSUs to its non-management directors as part of the equity portion of their annual retainer and are fully vested at grant. Each DSU provides the right to the issuance of a share of our common stock, within ten days after the earlier of the director’s death or disability, the 13-month anniversary of the grant date or the director’s separation from service. Each director may also elect within a month after the grant date to defer the receipt of shares for five or more years. No election can be made to accelerate the issuance of stock from a DSU.
Total stock-based compensation cost recognized during the three and nine month periods ended September 30, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock-based compensation
|
$
|
0.1
|
|
|
$
|
3.9
|
|
|
$
|
8.2
|
|
|
$
|
15.2
|
|
The total number and type of awards granted during the periods presented and the related weighted-average grant-date fair values were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
|
Underlying
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|
Underlying
Shares
|
Weighted
Average
Grant Date
Fair Value
|
RSUs Granted
|
67,119
|
|
$
|
117.54
|
|
|
66,263
|
|
$
|
138.05
|
|
PSUs Granted
|
67,119
|
|
$
|
117.59
|
|
|
58,694
|
|
$
|
140.64
|
|
DSUs Granted
|
6,174
|
|
$
|
130.50
|
|
|
7,208
|
|
$
|
127.77
|
|
Total Awards
|
140,412
|
|
|
|
132,165
|
|
|
The RSUs granted during the periods presented above have vesting terms as follow:
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
Vest in equal annual installments over three years
|
67,119
|
|
|
64,172
|
|
Vest after three years
|
—
|
|
|
2,091
|
|
Total RSUs granted
|
67,119
|
|
|
66,263
|
|
NOTE 10. Debt
Schuldschein Loans
On March 22, 2018 the Company, through a European subsidiary, entered into a series of six individual senior unsecured loan agreements with an aggregate principal amount of €300.0 million (collectively, the Schuldschein Loans), as follows :
|
|
|
|
|
|
|
|
(Amounts in millions)
|
Face value
|
|
Coupon
|
Maturity date
|
Fixed rate term loan - Series A
|
€
|
10.0
|
|
|
0.85%
|
March 31, 2021
|
Fixed rate term loan - Series B
|
60.0
|
|
|
1.15%
|
March 31, 2022
|
Fixed rate term loan - Series C
|
80.0
|
|
|
1.43%
|
March 31, 2023
|
Floating rate term loan - Series A
|
50.0
|
|
|
6-month EURIBOR plus 80 bps
|
March 31, 2021
|
Floating rate term loan - Series B
|
60.0
|
|
|
6-month EURIBOR plus 90 bps
|
March 31, 2022
|
Floating rate term loan - Series C
|
40.0
|
|
|
6-month EURIBOR plus 100 bps
|
March 31, 2023
|
|
€
|
300.0
|
|
|
|
|
The Company paid approximately €1.1 million of debt issuance costs in connection with the Schuldschein Loans, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest under the fixed rate tranches is paid on March 31 of each year, and commenced on March 31, 2019. Interest under the floating rate tranches is paid semi-annually on March 31 and September 30 of each year, and commenced on September 30, 2018.
As of September 30, 2019, the outstanding debt balance net of unamortized debt issuance costs was €299.3 million ($327.6 million at September 30, 2019 exchange rates) of which €100.0 million ($109.5 million at September 30, 2019 exchange rates)
was used for the recapitalization of affiliated entities. The remaining proceeds will be utilized to meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or any part of the Schuldschein Loans in an amount equal to the higher of the outstanding nominal amount of such loans (or the part of it) and the discounted value.
The Schuldschein Loans contain customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization adjusted for certain items) ratio of not more than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months. The Company was in compliance with all of the covenants as of September 30, 2019.
Senior EUR Notes
On November 15, 2016, the Company issued an aggregate amount of €440 million of senior unsecured notes (collectively, the Senior EUR Notes) as follows:
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
Face value
|
|
Coupon
|
|
Maturity date
|
Series D Notes
|
€
|
190.0
|
|
|
0.84
|
%
|
|
November 15, 2023
|
Series E Notes
|
80.0
|
|
|
1.20
|
%
|
|
November 15, 2026
|
Series F Notes
|
170.0
|
|
|
1.36
|
%
|
|
November 15, 2028
|
|
€
|
440.0
|
|
|
|
|
|
The Company paid approximately $1.4 million of debt issuance costs in connection with the Senior EUR Notes, which has been presented in the condensed consolidated balance sheets as a direct reduction of the related debt liability. Interest on the Senior EUR Notes is payable semi-annually on January 1 and July 1 of each year, and commenced on July 1, 2017. As of September 30, 2019, the outstanding debt balance net of unamortized debt issuance costs was €439.1 million ($480.6 million at September 30, 2019 exchange rates). This debt balance included a revaluation loss of $6.5 million, net of taxes of $3.4 million, that has been recognized in cumulative translation adjustment within accumulated other comprehensive income. See Note 4 for further discussion.
The proceeds from the Senior EUR Notes were utilized to repay outstanding balances on our revolving credit facilities, fund our share repurchase program, finance acquisitions and meet general financing requirements.
Subject to certain conditions, the Company may, at its option, prepay all or part of the Senior EUR Notes plus any accrued and unpaid interest to the date of prepayment and certain penalties as defined in the note purchase agreement (the EUR Note Purchase Agreement). The Company may also be required, subject to certain events and conditions, to make an offer to prepay all of the Senior EUR Notes including any accrued and unpaid interest to the date of prepayment. Each holder has the option to accept or reject such offer to prepay.
The EUR Note Purchase Agreement contains customary affirmative and negative covenants, and financial covenants consisting of a consolidated net indebtedness to consolidated EBITDA ratio of not more than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months, as well as a consolidated EBITDA to consolidated net interest expense ratio of not less than three times at the end of each fiscal quarter based upon the preceding twelve consecutive months. The EUR Note Purchase Agreement also provides for customary events of default, the occurrence of which could result in an acceleration of the Company's obligations under the EUR Note Purchase Agreement. The Company was in compliance with all of the covenants as of September 30, 2019.
The Company also agreed to indemnify the note purchasers holding Senior EUR Notes that are subject to a swap agreement for certain potential losses associated with swap breakage resulting from a prepayment of the Senior EUR Notes or from an acceleration of the Senior EUR Notes as a result of an event of default.
Senior USD Notes
On June 25, 2015, the Company issued an aggregate amount of $500.0 million of senior unsecured notes (the Senior USD Notes). On April 30, 2018, the Company prepaid the outstanding principal amount of $500.0 million on the Senior USD Notes,
and recognized a loss on debt extinguishment of $2.3 million net of taxes, of which the pretax amount, $2.6 million, was included in other non-operating expenses in the condensed consolidated statement of operations.
Revolving Credit Facilities
Effective June 28, 2018, the Company amended its existing multi–currency unsecured revolving credit facility, increasing the maximum principal amount of borrowings under the facility from $400 million (the 2015 Facility) to $600 million (the 2018 Facility), with an option to increase up to an additional $250 million. The 2018 Facility also extended the previously scheduled maturity date of September 30, 2022 for the 2015 Facility to June 28, 2023, subject to two one–year extension options, of which the first one was exercised on May 28, 2019, extending the maturity date by one year to June 28, 2024. Concurrent with entering into the 2018 Facility, the Company also terminated the $100 million multi-currency five-year unsecured revolving credit facility (the 2014 Facility) that was due to expire on December 17, 2019.
On the effective date of the 2018 Facility, the Company repaid the outstanding balance of €104.0 million and €52.0 million under the 2015 Facility and 2014 Facility and commenced borrowing under the 2018 Facility. Under the 2018 Facility, the Company may borrow, on a revolving basis, outstanding loans in an aggregate principal amount at any one time not in excess of $600 million and the 2018 Facility also provides for up to $50 million for standby letters of credit and swing line loans.
At September 30, 2019, there was €25.0 million ($27.4 million at September 30, 2019 exchange rates) outstanding under the 2018 Facility and there were no outstanding letters of credit or swing line loans. There were no borrowings, letters of credit or swing line loans outstanding as of December 31, 2018. The proceeds from borrowings under the 2018 Facility are available to fund acquisitions, provide working capital and for other general corporate purposes.
Interest on loans under the 2018 Facility is calculated at a rate per annum equal to an applicable margin which can vary from 0.30% to 0.85% based on the Company's leverage ratio plus LIBOR for loans denominated in U.S. Dollars and EURIBOR for loans denominated in Euros (SIBOR for loans denominated in Singapore Dollars and HIBOR for loans denominated in Hong Kong Dollars).
The 2018 Facility contains terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Financial covenants include a leverage test (consolidated net indebtedness not to exceed three times adjusted four quarter trailing consolidated EBITDA) and a maximum subsidiary indebtedness test. The maximum subsidiary indebtedness test limits the total aggregate amount of indebtedness of the Company's subsidiaries, excluding indebtedness under the 2018 Facility, to 20 percent of consolidated total assets as at the end of the most recently ended financial year, of which not more than $150 million may be secured, provided however that the Company may incur additional subsidiary indebtedness subject to, inter alia, providing additional corporate guarantees. Other undertakings and covenants include delivery of financial reports and other information, compliance with laws including environmental laws and permits, the Employee Retirement Income Security Act (ERISA) and U.S. regulations, the Foreign Account Tax Compliance Act (FATCA), sanctions-related obligations, negative pledge, limitations on mergers and sales of assets, change of business and use of proceeds. We were in compliance with all of the covenants as of September 30, 2019.
Other Debt
As of September 30, 2019, the Company had no additional borrowings from banks. This is in comparison to $0.5 million as of December 31, 2018 which was fully classified as long-term debt.
NOTE 11. Leases
The Company has operating leases for warehouses, corporate offices, cars, forklifts and certain equipment. On January 1, 2019, the Company adopted the accounting and transition guidance in ASC 842 for its operating leases resulting in the recognition of operating lease right-of-use (ROU) assets and lease liabilities on the effective date. The Company measures ROU assets throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. The lease liabilities are measured at the present value of the unpaid lease payments at the lease commencement date. Leases that include both lease and non-lease components are accounted for as a single lease component for each asset class.
The minimum payments under operating leases are recognized on a straight-line basis over the lease term in the condensed consolidated statements of operations. Operating lease expenses related to variable lease payments are recognized in cost of sales or as operating expenses in a manner consistent with the nature of the underlying lease and as the events, activities, or circumstances
in the lease agreement occur. Leases with a term of less than 12 months are not recognized on the condensed consolidated balance sheets and the related lease expenses are recognized in the condensed consolidated statements of operations on a straight-line basis over the lease term and are recorded as operating expenses.
The accounting for leases requires management to exercise judgment and make estimates in determining the applicable discount rate, lease term and payments due under a lease. If a lease does not provide an implicit rate, the Company uses the incremental borrowing rate to determine the present value of future lease payments. The incremental borrowing rate is applied to leases on a portfolio basis and is determined from a rate for borrowings with a term equal to one-half the total lease term and an amount equal to the total minimum lease payments. A Euro (EUR) and United States Dollar (USD) quote are used because these currencies represent the majority of the lease population.
The lease term includes the non-cancellable period of the lease plus any additional periods covered by either an option to extend (or not terminate) that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) a lease controlled by the lessor. The Company has leases with a lease term ranging from 1 year to 15 years. Lease payments are generally comprised of fixed payments including in-substance fixed payments, payments that depend on an index or rate, any amounts payable under residual value guarantees, as well as any exercise price for a Company option to purchase the underlying asset if it is reasonably certain the Company will exercise the option. The Company generally does not provide residual value guarantees.
The operating leases of the Company do not contain major restrictions or covenants such as those relating to dividends or additional financial obligations. Finance leases and income related to subleasing are immaterial to the condensed consolidated financial statements. There were no lease transactions with related parties as of September 30, 2019.
The operating lease expense for the three and nine months ended September 30, 2019 was $7.7 million and $23.3 million, respectively. Lease expenses related to variable lease payments and short term leases were immaterial. Other information related to operating leases is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
2019
|
|
2019
|
Operating Lease Expense
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
7.6
|
|
|
$
|
23.1
|
|
ROU assets obtained in exchange for new lease liabilities
|
$
|
0.5
|
|
|
$
|
16.0
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
6.4
|
|
|
6.4
|
|
Weighted-average discount rate
|
1.6
|
%
|
|
1.6
|
%
|
Future minimum lease payments under non-cancellable operating leases as of September 30, 2019 were as follows:
|
|
|
|
|
(Amount in millions)
|
|
2019 (excluding nine months ended September 30, 2019)
|
$
|
6.0
|
|
2020
|
27.8
|
|
2021
|
18.8
|
|
2022
|
14.8
|
|
2023
|
11.4
|
|
Thereafter
|
30.7
|
|
Total lease payments
|
109.5
|
|
Less: imputed interest
|
6.8
|
|
Total
|
$
|
102.7
|
|
|
|
Amounts recognized in the condensed consolidated balance sheet:
|
|
Current liabilities, included in other accrued liabilities
|
$
|
26.8
|
|
Long-term liabilities, as operating lease liabilities
|
$
|
75.9
|
|
NOTE 12. Warranties, Guarantees, Commitments and Contingencies
Warranties
Products sold by the Company are covered by a basic limited warranty with terms and conditions that vary depending upon the product and country in which it was sold. The limited warranty covers the equipment, parts and labor (in certain cases) necessary to satisfy the warranty obligation generally for a period of two years. Estimated product warranty expenses are accrued in cost of goods sold at the time the related sale is recognized. Estimates of warranty expenses are based primarily on warranty claims experience and specific customer contracts. Warranty expenses include accruals for basic warranties for product sold, as well as accruals for product recalls, service campaigns and other related events when they are known and estimable. Recoveries from suppliers are recognized when an arrangement with the supplier exists and collectibility is assured. Amounts recognized as recoveries do not exceed related warranty costs accrued. To the extent the Company experiences changes in warranty claim activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly. Warranty accrual estimates and the allocation of warranty between short and long term are updated based upon the most current warranty claims information available.
The following is a summary of changes in the Company’s product warranty liability for the three and nine month periods ended September 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amount in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance of warranty costs accrued, beginning of period
|
$
|
44.9
|
|
|
$
|
53.9
|
|
|
$
|
43.7
|
|
|
$
|
50.9
|
|
Warranty costs accrued
|
8.2
|
|
|
5.1
|
|
|
25.1
|
|
|
25.9
|
|
Warranty claims settled
|
(4.5
|
)
|
|
(8.4
|
)
|
|
(20.1
|
)
|
|
(24.7
|
)
|
Foreign exchange translation effects
|
(1.3
|
)
|
|
0.1
|
|
|
(1.4
|
)
|
|
(1.4
|
)
|
Balance of warranty costs accrued, end of period
|
$
|
47.3
|
|
|
$
|
50.7
|
|
|
$
|
47.3
|
|
|
$
|
50.7
|
|
Current liability, disclosed as current portion of warranties
|
$
|
26.5
|
|
|
$
|
29.9
|
|
|
$
|
26.5
|
|
|
$
|
29.9
|
|
Long-term liability, included in other liabilities
|
$
|
20.8
|
|
|
$
|
20.8
|
|
|
$
|
20.8
|
|
|
$
|
20.8
|
|
|
|
|
|
|
|
|
|
Warranty costs accrued
|
$
|
8.2
|
|
|
$
|
5.1
|
|
|
$
|
25.1
|
|
|
$
|
25.9
|
|
Less: received and anticipated recoveries from suppliers
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.5
|
)
|
Warranty costs net of received and anticipated recoveries
|
$
|
8.2
|
|
|
$
|
4.9
|
|
|
$
|
25.1
|
|
|
$
|
25.4
|
|
Guarantees and Commitments
The Company has uncollateralized bank guarantees for $27.3 million, of which $16.4 million is related to statutorily-required guarantees for tax and other litigation, $3.0 million is related to letters of credit, and $7.9 million is related to other individually immaterial items.
As disclosed in our 2018 Form 10-K, the Company entered into a distribution agreement with Meritor Inc. (Meritor) to serve as the exclusive distributor for a certain range of WABCO Aftermarket products in the U.S. and Canada and also its non-exclusive distributor in Mexico. The agreement provided Meritor with the option to sell these distribution rights to the Company for an exercise price between $225 million and $265 million, based on the earnings of the distribution business, during certain time periods and under certain circumstances, including a change in control of the Company. On September 13, 2019, Meritor exercised its option to terminate the distribution agreement and sell the distribution rights to the Company due to the announcement of the Merger. The purchase price for the distribution rights is payable in cash and will result in an increase to the intangible assets balance. The Company is expected to complete the acquisition in the first quarter of 2020.
Right of Recourse
As discussed in Note 6, the Company may receive bank acceptance drafts from customers in China in payment of outstanding accounts receivable in the ordinary course of business. These bank acceptance drafts are non-interest bearing obligations of the issuing bank and generally have contractual maturities of six months or less. The Company may use these banker's acceptance drafts prior to the scheduled maturity date to settle outstanding accounts payable with vendors. Bank acceptance drafts transferred to vendors are subject to customary right of recourse provisions prior to their scheduled maturity date. As of September 30, 2019 and December 31, 2018, the Company had approximately $17.5 million and $28.2 million, respectively, of bankers acceptance
drafts subject to customary right of recourse provisions, which were transferred to vendors and had not reached their scheduled maturity date. Historically, the bankers acceptance drafts have settled upon maturity without any claim of recourse against the Company.
Contingencies
We are subject to proceedings, lawsuits and other claims related to products and other matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable and reasonably possible losses. A determination of the amount of liability to be recorded, if any, for these contingencies is made after careful analysis of each individual issue.
Under an indemnification agreement, WABCO Brazil is responsible for certain claims related to Trane's (formerly called American Standard) business for periods prior to the Company's spin-off from Trane in 2007. In particular, there are tax claims pending in various stages of the Brazilian legal process related to income, social contribution and/or value added taxes for which a contingency exists and which may or may not ultimately be incurred by the Company.
As previously disclosed, this includes one particular case for which an accrual of BRL 38.9 million including interest ($9.4 million based on September 30, 2019 exchange rates) was recorded based on management's assessment after considering advice of external legal counsel with respect to the likelihood of loss in this case. A corresponding deposit was made in the first quarter of 2017 into an escrow account with the Brazilian government, representing substantially all of the potential liability for the case. In March 2018, our appeal to have this case heard at the Brazilian Superior Court of Justice (the Court) was accepted. The Court subsequently heard the case and rejected our position ultimately ruling in favor of the tax authorities during the first quarter of 2018. There will be no further appeals. Accordingly, management expects this case to be closed by the Brazilian authorities within the next twelve months and has classified the accrual and deposit within other current liabilities and other current assets, respectively, as of September 30, 2019.
The estimated total amount of other remaining contingencies for tax claims under the indemnification agreement as of September 30, 2019 was $15.9 million including interest. However, based on management’s assessment following advice of our external legal counsel, the Company believes that it has valid arguments in all of these cases and thus no accrual is required at this time.
Merger Litigation
Following the announcement of the execution of the Merger Agreement, two putative class action complaints and two individual complaints were filed against the Company and the Board of Directors. On April 23, 2019, the first putative class action complaint was filed against the Company and the Board of Directors in the United States District Court for the District of Delaware under the caption Collier v. WABCO Holdings Inc., et al., No. 1:19-cv-00729 (D. Del.). On April 24, 2019, the second putative class action complaint was filed against the Company and the Board of Directors in the United States District Court for the District of Delaware under the caption Kent v. WABCO Holdings Inc., et al., No. 1:19-cv-00735 (D. Del.). On April 29, 2019, a third complaint was filed against the Company and the Board of Directors in the United States District Court for the District of Delaware under the caption Stein v. WABCO Holdings Inc., et al., No. 1:19-cv-00782 (D. Del.). On May 2, 2019, a fourth complaint was filed against the Company and the Board of Directors in the United States District Court for the District of Delaware under the caption Kengchoon v. WABCO Holdings Inc., et al., No. 1:19-cv-00816 (D. Del.).
The defendants believed that these four lawsuits were without merit and the defendants specifically denied all allegations that any supplemental disclosure was required. However, to moot certain disclosure claims in these lawsuits, to avoid nuisance, potential expense and delay and to provide additional information to WABCO’s shareholders, on June 17, 2019, WABCO voluntarily supplemented its definitive proxy statement by publicly filing additional disclosures.
In August 2019, each of the plaintiffs in these four lawsuits filed a notice of voluntary dismissal that reserved the right to seek an award of attorneys’ fees. While these plaintiffs have dismissed these actions, it is possible that additional lawsuits related to the Merger may be filed in the future in the same or other courts that name the same or additional defendants, in which case we could be similarly materially and adversely affected by such additional litigation. We cannot assure you as to the outcome of any future lawsuits, including the costs associated with defending such claims or any other liabilities that may be incurred in connection with litigation or settlement of such claims.
NOTE 13. Income Taxes
Income tax expense is the net result of taxes on the mix of earnings in multiple tax jurisdictions, foreign tax credits and rulings, the assessment and accrual of uncertain tax positions resulting from tax authority audits or changes in the interpretation of the law. For interim income tax reporting, we estimate our annual effective tax rate and apply it to our year-to-date ordinary income (loss). Tax jurisdictions with a projected or year-to-date loss for which a tax benefit cannot be realized are excluded. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
The income tax expense was $15.9 million and $48.9 million on pretax income of $76.7 million and $272.3 million before adjusting for noncontrolling interest for the three and nine months ended September 30, 2019, and $13.5 million and $63.3 million on pretax income of $93.3 million and $359.1 million before adjusting for noncontrolling interest for the three and nine months ended September 30, 2018. The increase in income tax expense for the three month period is primarily the result of discrete tax benefits during the third quarter of 2018 related to changes in uncertain tax positions and return to provision adjustments partially offset by lower pre-tax income in 2019. The decrease in income tax expense for the nine month period is primarily the result of lower pre-tax income in 2019.
On February 14, 2019, the General Court of the European Union (the General Court) issued a judgment annulling a European Commission decision which had previously declared the Belgium Excess Profit Ruling (EPR) regime as illegal and incompatible with European State Aid law. The General Court ruled that the European Commission had wrongly considered that the Belgian provisions allowing tax exemptions of multinational companies’ excess profit granted by means of rulings could constitute an illegal state aid scheme. On April 24, 2019, the European Commission appealed that decision. On September 16, 2019, the European Commission announced that they opened separate in-depth investigations to assess whether excess profit rulings granted by Belgium to thirty-nine multinational companies (including WABCO) gave those companies an unfair advantage over their competitors, in breach of European Union State aid rules. At September 30, 2019, the Company maintained a tax reserve of $29.3 million pending further European Court developments regarding European Union State Aid cases.
Unrecognized tax benefits at September 30, 2019, including the $29.3 million of EPR clawback, amounted to $34.4 million, of which $31.2 million has been offset against deferred tax assets. The remaining unrecognized tax benefits of $3.2 million were classified as either a short-term or long-term liability depending on the expected timing of the resolution. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.
In February 2018, the Company received a final tax and interest assessment in India for the 2013 tax year related to a capital gain on an intercompany transfer of an Indian subsidiary. The assessment was for INR 3.5 billion ($50.2 million at September 30, 2019 exchange rates). In addition, a penalty assessment was issued in March 2018 for INR 2.1 billion ($30.4 million at September 30, 2019 exchange rates). The Company believes that no tax is due under the relevant double tax treaty between the Netherlands and India and therefore no amount has been accrued. The Company appealed both the tax and penalty assessments. As of September 30, 2019, the Company has deposited installments totaling INR 706.4 million ($10.0 million at September 30, 2019 exchange rates) in order to proceed with the appeal. The remaining tax demand and penalty is currently held in abeyance.
As described in Note 2, the Company adopted the provisions of ASU 2018–02 as of January 1, 2019 which was applicable to deferred taxes on pension obligations and unrealized foreign currency losses on net investment hedges that had been previously recognized in other comprehensive income. This resulted in the reclassification of $8.4 million from accumulated other comprehensive income to retained earnings, representing the stranded tax. The Company’s policy is to follow the portfolio approach for releasing income tax effects recorded in AOCI.
NOTE 14. Streamlining Expenses
The Company accounts for employee-related streamlining charges as either a one-time benefit arrangement or an ongoing benefit arrangement as appropriate under the applicable accounting guidance. From time to time the Company also has streamlining charges that are not related to employees, such as facility exit costs.
In the third quarter of 2015, the Company announced proposals to cease manufacturing at two production facilities to preserve the Company's global competitiveness for certain mechanical products. These proposals resulted in a workforce reduction of 316 positions and includes a smaller program initiated in the fourth quarter of 2014 (the 2014/2015 Program). As of September 30, 2019, production at both facilities has been transferred to other facilities within the Company's globally integrated supply chain. The cumulative costs incurred as of September 30, 2019 related to the 2014/2015 Program was $65.7 million, which approximates the total expected costs to be incurred under this program.
Based on the Company’s efforts to maintain our global footprint, the Company has periodically entered into other streamlining programs as deemed necessary which may include workforce reductions, site closures and rotation of manufacturing footprint to
low cost regions (Other Programs). In 2019 streamlining costs incurred for Other Programs related to the relocation of corporate functions to the new global headquarters, headcount reductions and the transfer of certain product lines and business processes to best cost countries.
The following is a summary of changes in the Company’s streamlining program liabilities for the three and nine month periods ended September 30, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amounts in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance at beginning of period
|
$
|
18.9
|
|
|
$
|
29.6
|
|
|
$
|
26.4
|
|
|
$
|
43.7
|
|
Charges
|
7.4
|
|
|
5.4
|
|
|
13.3
|
|
|
5.7
|
|
Payments
|
(3.9
|
)
|
|
(8.0
|
)
|
|
(17.3
|
)
|
|
(21.7
|
)
|
Foreign exchange effects
|
(0.9
|
)
|
|
0.2
|
|
|
(0.9
|
)
|
|
(0.5
|
)
|
Balance at end of period (1)
|
$
|
21.5
|
|
|
$
|
27.2
|
|
|
$
|
21.5
|
|
|
$
|
27.2
|
|
Current liabilities, included in other accrued liabilities
|
$
|
10.9
|
|
|
$
|
19.3
|
|
|
$
|
10.9
|
|
|
$
|
19.3
|
|
Long-term liability, included in other liabilities
|
$
|
10.6
|
|
|
$
|
7.9
|
|
|
$
|
10.6
|
|
|
$
|
7.9
|
|
(1) Includes $3.3 million and $6.9 million related to the 2014/2015 Program as of September 30, 2019 and 2018 respectively.
A summary of the streamlining costs related to the above programs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
(Amounts in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Employee-related charges – cost of sales
|
$
|
6.8
|
|
|
$
|
1.9
|
|
|
$
|
9.5
|
|
|
$
|
1.8
|
|
Employee-related charges – selling and administrative
|
0.6
|
|
|
2.6
|
|
|
4.0
|
|
|
2.8
|
|
Other streamlining charges
|
—
|
|
|
0.9
|
|
|
(0.2
|
)
|
|
1.1
|
|
Total streamlining costs
|
$
|
7.4
|
|
|
$
|
5.4
|
|
|
$
|
13.3
|
|
|
$
|
5.7
|
|
For the three month period ended September 30, 2019, the Company recorded costs of $7.2 million related to headcount reductions and $0.2 million related to the 2014/2015 Program. For the three month period ended September 30, 2018, the Company recorded costs of $4.4 million related to headcount reductions and footprint relocation and $1.0 million related to the 2014/2015 Program.
For the nine month period ended September 30, 2019, the Company recorded costs of $12.8 million related to headcount reductions and $0.5 million related to the 2014/2015 Program and for the nine month periods ended September 30, 2018, the Company recorded costs of $4.4 million related to headcount reductions and footprint relocation and $1.3 million related to the 2014/2015 Program.
NOTE 15. Pension and Post-retirement Benefits
Post-retirement pension, health and life insurance costs had the following components for the three and nine month periods ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended September 30,
|
|
2019
|
|
2018
|
(Amounts in millions)
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
Service cost-benefits earned during period
|
$
|
6.0
|
|
|
$
|
0.2
|
|
|
$
|
6.3
|
|
|
$
|
0.2
|
|
Interest cost on the projected benefit obligation
|
4.0
|
|
|
0.1
|
|
|
3.9
|
|
|
0.1
|
|
Less: expected return on plan assets
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
Amortization of prior service cost
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
5.9
|
|
|
0.1
|
|
|
6.0
|
|
|
0.1
|
|
Pension and post-retirement benefit plan cost
|
$
|
14.8
|
|
|
$
|
0.4
|
|
|
$
|
15.0
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
2019
|
|
2018
|
(Amounts in millions)
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
|
Pension
Benefits
|
|
Health
& Life
Ins.
Benefits
|
Service cost-benefits earned during period
|
$
|
19.7
|
|
|
$
|
0.5
|
|
|
$
|
19.4
|
|
|
$
|
0.6
|
|
Interest cost on the projected benefit obligation
|
12.3
|
|
|
0.3
|
|
|
12.2
|
|
|
0.3
|
|
Less: expected return on plan assets
|
(3.6
|
)
|
|
—
|
|
|
(3.8
|
)
|
|
—
|
|
Amortization of prior service cost
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
18.0
|
|
|
0.4
|
|
|
18.5
|
|
|
0.3
|
|
Pension and post-retirement benefit plan cost
|
$
|
46.8
|
|
|
$
|
1.2
|
|
|
$
|
46.3
|
|
|
$
|
1.2
|
|
The weighted-average expected rates of return on plan assets used to determine the pension and post-retirement benefit plan cost for the three and nine month periods ended September 30, 2019 and 2018 were based on the rates determined as of the beginning of each of the fiscal years of 2.40% and 2.75%, respectively.
The Company makes contributions to funded pension plans that, at a minimum, meet all statutory funding requirements. Contributions in 2019, as well as payments of benefits incurred by unfunded plans, were in line with the expectations for 2019 and also in line with the contributions made during 2018.
Pension and post-retirement benefit plan cost is included in cost of sales, selling and administrative expenses and non-operating expenses on the condensed consolidated statements of operations.
NOTE 16. Derivative Instruments and Hedging Activities
ASC 815, Derivatives and Hedging, requires a company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies and has been designated as a hedge for accounting purpose. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.
The Company recognizes all derivative financial instruments in the condensed consolidated balance sheet at fair value using Level 2 inputs and these are classified as other current assets, other assets, other accrued liabilities or other liabilities on the condensed consolidated balance sheets. The impact resulting from changes in the fair value of derivative instruments is recorded in the same line item in the condensed consolidated statements of operations as the underlying exposure being hedged or in accumulated other comprehensive income (AOCI) for derivatives that qualify and have been designated as cash flow hedges or hedges of a net investment in a foreign operation. Any ineffective portion of a financial instrument's change in fair value is recognized in earnings together with changes in the fair value of any derivatives not designated as relationship hedges.
Net Investment Hedges
The Company designated borrowings under its revolving credit facilities and Senior EUR Notes to partially hedge the foreign currency exposure of its net investment in certain Euro-denominated wholly-owned subsidiaries. As of September 30, 2019 and December 31, 2018, the Company designated Euro-denominated loans of €465.0 million (approximately $509.0 million at September 30, 2019 exchange rate) and €440.0 million (approximately $503.6 million at December 31, 2018 exchange rate) as hedges of its net investment in these subsidiaries.
For the three month periods ended September 30, 2019 and 2018, the Company recorded a gain of $15.4 million, net of taxes of $4.3 million, and a loss of $4.7 million, net of taxes of $1.4 million, respectively, in cumulative translation adjustment within AOCI. For the nine month periods ended September 30, 2019 and 2018, the Company recorded a gain of $18.5 million, net of taxes of $5.2 million, and a gain of $4.3 million, net of taxes of $1.2 million, respectively, in cumulative translation adjustment within AOCI.
Derivatives Not Designated as Hedges
Foreign exchange contracts are also used by the Company to offset the earnings impact relating to the variability in exchange rates on certain assets and liabilities denominated in non-functional currencies and have not been designated as relationship hedges. As of September 30, 2019 and December 31, 2018, the Company had the following outstanding notional amounts related to foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
As of September 30, 2019
|
|
As of December 31, 2018
|
Foreign Currency
|
|
Unit of Measure
|
|
Hedged against
|
|
Quantity Hedged
|
|
Notional Amount (USD Equivalent)
|
|
Quantity Hedged
|
|
Notional Amount (USD Equivalent)
|
Chinese Yuan
|
|
CNY
|
|
EUR
|
|
863.0
|
|
|
121.1
|
|
|
849.0
|
|
|
123.4
|
|
Hong Kong Dollar
|
|
HKD
|
|
EUR
|
|
267.0
|
|
|
34.1
|
|
|
285.0
|
|
|
36.4
|
|
Polish Zloty
|
|
PLN
|
|
EUR
|
|
57.0
|
|
|
14.2
|
|
|
*
|
|
|
*
|
|
British Pound
|
|
GBP
|
|
EUR
|
|
*
|
|
|
*
|
|
|
11.7
|
|
|
14.9
|
|
* No significant outstanding foreign currency forward contracts
The Company had additional foreign currency forward contracts with notional amounts that individually amounted to less than $10 million. As of September 30, 2019 and December 31, 2018, forward contracts for an aggregate notional amount of €180.3 million ($197.3 million at September 30, 2019 exchange rates) and €170.2 million ($194.8 million at December 31, 2018 exchange rates), respectively, were outstanding with average durations of less than one month. The majority of these exchange contracts were entered into on September 27, 2019 and December 27, 2018, respectively. These foreign exchange contracts have offset the revaluation of assets and liabilities. The Company recognized non-operating gains of $3.7 million and $2.2 million for the nine months ended September 30, 2019 and 2018, respectively. The fair value of these derivatives was an asset of $1.1 million and $0.6 million at September 30, 2019 and at December 31, 2018, respectively.
NOTE 17. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 were as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
(Amounts in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term and other investments(a)
|
$
|
—
|
|
|
$
|
200.7
|
|
|
$
|
—
|
|
|
$
|
200.7
|
|
Foreign currency derivative assets(b)
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
(Amounts in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Short-term and other investments(a)
|
$
|
—
|
|
|
$
|
209.4
|
|
|
$
|
—
|
|
|
$
|
209.4
|
|
Foreign currency derivative assets(b)
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
(a) Short-term and other investments consist of mutual funds or deposit funds holding primarily term deposits, certificates of deposit and short-term bonds. The Company considers highly liquid investments with maturities of three months or less
when purchased to be cash and cash equivalents. The fair value of short-term and other investments is determined based on pricing sources for identical instruments in less active markets. The unrealized gains and losses on short–term and other investments still held at the reporting date were immaterial for the three and nine month periods ended September 30, 2019 and 2018.
(b) Fair value of derivative instruments determined based on Level 2 inputs including credit ratings and other criteria observable
in the market.
Other Fair Value Disclosures
As of September 30, 2019 and December 31, 2018, the carrying amount of the Company's investments in repurchase agreements, guaranteed notes receivable and long-term debt were determined to approximate their fair values based on Level 2 inputs.
During the three months ended September 30, 2019, the Company increased the carrying value of one of its non-marketable equity investments by $2.2 million based on an observable price change for a similar investment of the same issuer. The Company had previously recognized an impairment of $5.5 million during the three months ended September 30, 2018 based on the estimated decline in the fair value of one of its other non-marketable equity investments. Both the upward and downward adjustments were reflected in other non-operating income/expense. There have been no other upward or downward adjustments to non-marketable equity investments. As of September 30, 2019 and December 31, 2018, the carrying amount of the non-marketable equity investments was $27.6 million and $25.4 million, respectively.